Internal Revenue Bulletin:
2006-39

September 25, 2006

INCOME TAX

Conservation Security Program (CSP). This
ruling holds that the Conservation Security Program is substantially similar
to the type of programs described in section 126(a)(1) through (8) of the
Code within the meaning of section 126(a)(9). As a result, all or a portion
of cost-share payments received under the CSP is eligible for exclusion from
gross income to the extent permitted by section 126.

Fringe benefits aircraft valuation formula. The
Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge
in effect for the second half of 2006 are set forth for purposes of determining
the value of noncommercial flights on employer-provided aircraft under section
1.61-21(g) of the regulations.

LIFO; price indexes; department stores. The
July 2006 Bureau of Labor Statistics price indexes are accepted for use by
department stores employing the retail inventory and last-in, first-out inventory
methods for valuing inventories for tax years ended on, or with reference
to, July 31, 2006.

Final, temporary, and proposed regulations under sections 882 and 884
of the Code state that foreign corporations engaged in a trade or business
within the United States are subject to tax on their income that is treated
as effectively connected with the trade or business. Expenses related to that
income are allocable and deductible against the effectively connected income
to determine the foreign corporation’s net U.S. taxable income. Special
rules apply to the allocable amount of interest expense allowed in determining
the net U.S. taxable income. Additional rules for foreign banking corporations
are also applicable. Certain clarifications and conforming updates are also
made to the 1996 final regulations under section 1.882-5.

Final, temporary, and proposed regulations under sections 882 and 884
of the Code state that foreign corporations engaged in a trade or business
within the United States are subject to tax on their income that is treated
as effectively connected with the trade or business. Expenses related to that
income are allocable and deductible against the effectively connected income
to determine the foreign corporation’s net U.S. taxable income. Special
rules apply to the allocable amount of interest expense allowed in determining
the net U.S. taxable income. Additional rules for foreign banking corporations
are also applicable. Certain clarifications and conforming updates are also
made to the 1996 final regulations under section 1.882-5.

Proposed regulations under section 263 of the Code explain how section
263(a) applies to amounts paid to acquire, produce, or improve tangible property.
The proposed regulations clarify what amounts must be capitalized, rather
than deducted currently, and how those capitalized amounts should be treated.
A public hearing is scheduled for December 19, 2006.

Extension of replacement period for livestock
sold on account of drought. This notice explains the circumstances
under which the 4-year replacement period under section 1033(e)(2) of the
Code is extended for livestock sold on account of drought. The notice informs
taxpayers that the Service will publish an annual list of counties that experienced
exceptional, extreme, or severe drought conditions, which a taxpayer can use
to determine if an extension is available.